Core Viewpoint - The U.S. Treasury yield curve is expected to steepen in the coming months due to anticipated Federal Reserve rate cuts, which will lower short-term yields while longer-dated yields remain elevated [1][2]. Treasury Yield Trends - Recent data indicates a decline in Treasury yields, with the benchmark 10-year yield reaching a five-month low, influenced by a weaker labor market and a significant downward revision of job creation estimates [2][4]. - The current 10-year yield is at 4.08%, projected to rise to 4.20% in three months and 4.25% in a year, which is lower than previous forecasts [4]. Rate Cut Expectations - Interest rate futures are now pricing in three 25 basis point cuts from the Federal Reserve this year, an increase from earlier expectations of two cuts [3]. - Analysts predict that the 2-year Treasury yield, currently at 3.55%, will remain stable for six months before declining to 3.40% in a year, leading to a widening spread between 2- and 10-year yields [6]. Market Sentiment - A majority of analysts (85%) anticipate that the U.S. yield curve will steepen by year-end, reflecting a consensus on the direction of interest rates [6]. - The steepening of the yield curve is attributed to a rising term premium, driven by fiscal deficits, tariff uncertainties, and concerns regarding the Federal Reserve's independence [7].

The term premium on Britain’s gilts has risen sharply over the past years and is now notably higher than in America, the euro area or Japan https://t.co/uf0U5er1aN ...

Investment Rating - The report maintains a neutral stance on duration while finding value at the front end of the yield curve [3][11][17] Core Insights - The report projects the first Federal Reserve cut in December 2025, with expectations for 2-year Treasury yields to reach 3.50% and 10-year yields to reach 4.35% by year-end 2025 [11][14] - The oil market is factoring in a 21% chance of a significant disruption in Gulf energy production, with crude prices potentially reaching $120-130 [8][45] - The report emphasizes a shift in focus from monetary policy to fiscal policy, particularly regarding the German budget and NATO agreements on defense spending [8][49] US Rates - Value is found at the front end, with expectations for higher yields to add duration as money markets are pricing in earlier and more aggressive Fed easing than the report's forecast [3][11] - The report anticipates an increase in Treasury coupon auction sizes starting in February 2026, although there may be a forgoing of increases to longer-end auction sizes [3][30] International Rates - Developed market yields remained stable despite geopolitical tensions, with central bank meetings occurring amid subdued market activity [4][48] Commodities - The report highlights a major oil supply disruption risk at 21%, with a bullish outlook on corn and cotton prices despite muted price responses [8][45] Currencies - The report maintains a bearish stance on the USD, driven by US growth moderation and global fiscal policies that support growth outside the US [70][72] Emerging Markets - The report recommends an overweight position in emerging market currencies while underweighting emerging market sovereign credit, with a market weight stance on local rates and corporates [8][45]